taxation case law_semester3

8/10/2019 Taxation Case Law_semester3

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PREPARED BY RADHIKA SETH, PLEASE VOTE , BALLOT No. 2

These notes are prepared by Radhika Seth,

Law Centre 2. This is meant only for

personal use of students. It is not meant

for public or wholesale distribution.

VOTE FOR MY PANEL ON 13TH

SEPTEMBER-

ELECTION DAY.

RADHIKA SETH 2

FOR PRESIDENT

ANUBHAV SINGH 1

FOR SECRETARY

AMIT RANJAN 1

FOR CC

HARSH TOMAR 3FOR CC


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Leading cases

Commissioner of income tax verses g. R. Karthikeyan

(prize money received by winning a highway motorrally was held to be 'income'.)

Facts: the assessee, g. R. Karthikeyan, assessed as an individual, was having income from various sourcesincluding salary and business income. During the accounting year relevant to the assessment year 1973-74,

he participated in the all india highway motor rally. He was awarded the first prize of rs. 20,000 by the indian oil

corporation and another sum of rs. 2,000 by the all india highway motor rally. The method of ascertaining the

first prize was based on a system of penalty points for various violation. The competitor with the least penalty

points was adjudged the first prize winner. The rally was designed to test endurance, driving and the reliability of the

automobiles. One had to drive one's vehicle observing the traffic regulation at different places as also the

regulation prescribed by the rally committee. The income tax officer included the said amounts of rs. 22,000 in the

income of the respondent assessee relying upon the definition of "income" in clause 24 of section 2 of the

income-tax act, 1961.

Issue: whether, on the facts and circumstances of the case, the total sum of rs. 22,000 received by theassessee from the indian oil corporation and all india highway motor rally should be treated as "income" under

income-tax act, 1961.

Decision of the supreme court: the supreme court held that the receipt in question does constitute(iincome as

defined in clause 24 of section 2 of the income tax act, 1961. In the course of judgement the court said as follows:

the definition in the act is an inclusive one. As said by lord wright in raja bahadur kamaksya narain singh verses

c.i.t. (1943) 11 i.t.r. 513, 521 (pc), "income... Is a word difficult and perhaps impossible to define in any precise

general formula; it is a word of the broadest connotation. In maharaj kumar gopal saran verses c.lt. (1935) 3 i.t.r.

237, 242 (pc), the privy council pointed out that "anything which can properly be described as income, is

taxable under the act unless expressly exempted. The supreme court quoted the following paragraph from the

decision of navin chandra mafatlal verses c.lt:

"what, then, is the ordinary natural and grammatical meaning of the word "income"? According to the dictionary it

means a thing that comes in (see oxford dictionary, volume v, and page 162). In the united states of america and in

australia both of which also are english speaking countries the word "income" is understood in a wide sense so as toinclude capital gain. ...its natural meaning embraces any profit or gain which is actually received. This is in

consonance with the observations of lord wright to which reference lias already been made... As already

observed, the word should' be given its widest connotation in view of the fact that it occurs in a legislative

head conferring legislative power."

In navinchandra mafatlal verses c.i.t, the issue was whether section 12-b of the indian income-tax act 1922

authorized the imposition of a tax on capital gains was ultra vires the central legislature. The supreme court

in that case held that section 12-b of the indian income-tax act, 1922 was inter-vires the central legislature as

it fell within entry 54 (taxes on income other than agricultural income) of list i in the seventh schedule to the

government of indian act, 1935. Entry 82 of list i in the seventh schedule to the constitution of india also

empowers the parliament to levy taxes on income other than agricultural income.

In the present case their lordships of the supreme court held that the definition of income in section 2(24)to the income-tax act, 1961 is an inclusive one, its ambit should be the same as that of the word income occurring

in entry 82 of list i of the seventh schedule to the constitution corresponding to entry 54 of list 1 of the seventh

schedule to the government of india act, 1935.

In bhagwan das jain verses unionof india (1981) 128 i.t.r. 315 (sc) the issue was whether it is open to the

i.t.o. While computing the liability of an assessee to tax under the income-tax act, 1961 to include in the income

of the assessee any amount calculated in accordance with section 23(2) of the act in respect of a house in the


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occupation of the assessee for the purposes of his ownresidence. Entry 82 of list i of the seventh schedule to theconstitution empowers parliament to levy "taxes on income other than agricultural income". The court stated in that

case that words in the constitution conferring legislative power should receive a liberal construction arid should

be interpreted in their widest amplitude. The court observed that "income" includes not merely what is received or

what comes in by exploiting the use of property but also what one saves by using it oneself. The levy in question

squarely falls under entry 82 of list 1 of the constitution. The tax levied under the act is on income, though,

computed in an artificial way from house property and not on house property. In australia the annual value of thetax payer's residence owned by himself or used rent free is taken for consideration for the purpose of levy of

income-tax. In england also in the case of a residence of the assessee, the computation of income is made on the

basis of presumed income. The word "income" is of the widest amplitude and that it includes not merely what is

received or what comes in by exploiting the use of the property but also that which can be converted into

income.

Clause (9) of section 2 (24) of the act states that "income" includes any winnings from lotteries, crosswordpuzzles, races including horse races, card games and other games of any sort or from gambling or betting of anyform or nature whatsoever. The words 'other games of any sort' in clause (9) of section 2(24) are of wideamplitude. Their meaning is not confined to games of a gambling nature alone. Thus clause (9) is not confinedto mere gambling or betting activities. Even assuming that the word 'winnings' occurring at the inception ofclause (9) controls the meaning of the aforesaid words, it does not follow that merely because winnings from

gambling/betting activities are included within the ambit of income, the moneys-received from non-gambling andnon-betting activities are not so included. If moneys which are not earned - in the true sense of the word -constitute income, moneys earned by skill and toil would also constitute income. The rally in question was acontest, if not a race. The respondent - assessee entered the contest to win and to win the first prize. What he gotwas a 'return" for his skill and endurance. As such it is income. The word 'income

must be construed in m

widest sense.

Further, if a receipt does not fall within sub-clause (ix), or for that matter, any of the sub-clauses in section2(24), it may yet constitute income. Since the definition of income in section 2(24) is an inclusive one, its ambit,should be the same as that of the word income occurring in entry 82 of list i of the seventh schedule to theconstitution. Even if a receipt does not fall within the ambit of any of the sub-clauses in section 2(24), it maystill be income if it partakes of the nature of income. The idea behind providing inconclusive definition insection 2(24) is not to limit its meaning but to widen its net. The word "income" is of widest amplitude, it must

be given its natural and grammatical meaning.

Judging from the above stand point, the receipt concerned in this present case is also income. May be it is

casual in nature but it is income nevertheless. That even the casual income is "income" is evident from section

10(3).


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CIT verses Sitaldas Tirathdas

HIDAYATULLAH, J. - The Commissioner of Income Tax, Bombay City II, has filed this appeal with acertificate under Section 66-A(2) of the Income Tax Act, against the judgment and order of the HighCourt of Bombay dated September 20, 1957, in Income Tax Reference No. 15 of 1957.

2. The question referred to the High Court for its opinion by the Income Tax Appellate Tribunal, Bombay

was: Whether the assessee is entitled to a deduction of Rs 1350 and Rs 18,000 from his total income ofthe previous year relevant to Assessment Years 1953-54, 1954-55?

3. The assessee, Sitaldas Tirathdas of Bombay, has many sources of income, chief among them beingproperty, stocks and shares, bank deposits and share in a Firm known as Messrs Sitaldas Tirathdas. Hefollows the financial year as his accounting year. For Assessment Years 1953-54 and 1954-55, his totalincome was respectively computed at Rs 50,375 and Rs 55,160. This computation was not disputed byhim, but he sought to deduct therefrom a sum of Rs 1350 in the first assessment year and a sum of Rs18,000 in the second assessment year on the ground that under a decree he was required to pay thesesums as maintenance to his wife, Bai Deviben and his children. The suit was filed in the Bombay High

Court (Suit No. 102 of 1951) for maintenance allowance, separate residence and marriage expenses forthe daughters and for arrears of maintenance, etc. A decree by consent was passed on March 11, 1953,and maintenance allowance of Rs 1500 per month was decreed against him. For the account year endingMarch 31, 1953 only one payment was made, and deducting Rs 150 per month as the rent for the flatoccupied by his wife and children, the amount paid as maintenance under the decree came to Rs 1350.For the second year, the maintenance at Rs 1500 per month came to Rs 18,000 which was claimed as adeduction. No charge on the property was created, and the matter does not fall to be considered underSection 9(1)(iv) of the Income Tax Act. The assessee, however, claimed this deduction on the strength ofa ruling of the Privy Council in Bejoy Singh Dudhuria verses CIT [(1933) 1 ITR 135]. This contention of theassessee was disallowed by the Income Tax Officer, whose decision was affirmed on appeal by theAppellate Assistant Commissioner. On further appeal, the Tribunal observed: This is a case, pure andsimple, where an assessee is compelled to apply a portion of his income for the maintenance of personswhom he is under a personal and legal obligation to maintain. The Income Tax Act does not permit of

any deduction from the total income in such circumstances.The Tribunal mentioned in the statementof the case that counsel for the assessee put his contention in the following words: I claim a deductionof this amount from my total income because my real total income is whatever that is computed, whichI do not dispute, less the maintenance amount paid under the decree.

Mohini Thapar (Dead) by L.RS. Verses. C.I.T. (Central) Calcutta 7 The assessee appears to have relied alsoupon a decision of the Lahore High Court in Diwan Kishen Kishore verses. CIT. The Tribunal, however,referred the above question for the opinion of the High Court.

4. The High Court followed two earlier decisions of the same Court reported in Seth Motilal Manekchandverses CIT and Prince Khanderao Gaekwar verses CIT and held that, as observed in those two cases, thetest was the same, even though there was no specific charge upon property so long as there was anobligation upon the assessee to pay, which could be enforced in a court of law. In Bejoy Singh Dudhuriacase, there was a charge for maintenance created against the assessee, and the Privy Council hadobserved that the income must be deemed to have never reached that assessee, having been divertedto the maintenance-holders. In the judgment under appeal, it was held that the income to the extent ofthe decree must be taken to have been diverted to the wife and children, and never became income inthe hands of the assessee.


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5. The Commissioner of Income Tax questions the correctness of this decision and also of the two earlierdecisions of the Bombay High Court. We are of opinion that the contention raised by the Department iscorrect.

6. Before we state the principle on which this and similar cases are to be decided, we may refer tocertain rulings, which illustrate the aspects the problem takes. The leading case on the subject is the

decision of the Judicial Committee in Bejoy Singh Dudhuria case. There, the stepmother of the Raja hadbrought a suit for maintenance and a compromise decree was passed under which the stepmother wasto be paid Rs 1100 per month, which amount was declared a charge upon the properties in the hands ofthe Raja, by the Court. The Raja sought to deduct this amount from his assessable income, which wasdisallowed by the High Court at Calcutta. On appeal to the Privy Council, Lord Macmillan observed asfollows: But Their Lordships do not agree with the learned Chief Justice in his rejection of the view thatthe sums paid by the appellant to his step-mother were not incomeof the appellant at all. This in TheirLordships opinion is the true view of the matter. When the Act by Section 3 subjects to charge allincome of an individual, it iswhat reaches the individual as income which it is intended to charge. In the

present case the decree of the court by charging the appellants whole resources with a specificpayment to his step-mother has to that extent diverted his income from him and has directed it to hisstepmother; to that extent what he receives for her is not his income. It is not a case of the applicationby the appellant of part of his income in a particular way, it is rather the allocation of a sum out of his

revenue before it becomes income in his hands.

7. Another case of the Privy Council may well be seen in this connection. That case is reported in P.C.Mullick verses. CIT . There, a testator appointed the appellants as executors and directed them to pay Rs10,000 out of the income on the occasion of his addya sradh. The executors paid Rs 5537 for suchexpenses, and sought to deduct the amount from the assessable income. The Judicial Committeeconfirmed the decision of the Calcutta High Court disallowing the deduction, and observed that thepayments were made out of the income of the estate coming to the hands of the executors and inpursuance of an obligation Mohini Thapar (Dead) by L.RS. Verses. C.I.T. 8 (Central) Calcutta imposedupon them by the testator. It observed that it was not a case in which a portion of the income had beendiverted by an overriding title from the person who would have received it otherwise, and distinguishedthe case in Bejoy Singh Dudhuria case.

8. These cases have been diversely applied in India, but the facts of some of the cases bring out thedistinction clearly. In Diwan Kishen Kishore verses. CIT there was an impartible estate governed by thelaw of primogeniture, and under the custom applicable to the family, an allowance was payable to thejunior member. Under an award given by the Deputy Commissioner acting as arbitrator and according tothe will of the father of the holder of the estate and the junior member, a sum of Rs 7200 per year waspayable to the junior member. This amount was sought to be deducted on the ground that it was anecessary and obligatory payment, and that the assessable income must, therefore, be taken to be protanto diminished. It was held that the income never became a part of the income of the family or of theeldest member but was a kind of a charge on the estate. The allowance given to the junior member, itwas held, in the case of an impartible estate was the separate property of the younger member uponwhich he could be assessed and the rule that an allowance given by the head of a Hindu coparcenary toits members by way of maintenance was liable to be assessed as the income of the family, had no

application. It was also observed that if the estate had been partible and partition could have takenplace, the payment to the junior member out of the coparcenary funds would have stood on a differentfooting. In that case, the payment to the junior member was a kind of a charge which diverted a portionof the income from the assessee to the junior member in such a way that it could not be said that itbecame the income of the assessee.

9. In CIT verses. Makanji Lalji it was stated that in computing the income of a Hindu undivided familymonies paid to the widow of a deceased coparcener of the family as maintenance could not be


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deducted, even though the amount of maintenance had been decreed by the Court and had been madea charge on the properties belonging to the family. This case is open to serious doubt, because it fallswithin the rule stated in Bejoy Singh Dudhuria case; and though the High Court distinguished the case ofthe Judicial Committee, it appears that it was distinguished on a ground not truly relevant, namely, thatin Bejoy Singh Dudhuria case the Advocate-General had abandoned the plea that the stepmother wasstill a member of the undivided Hindu family. It was also pointed out that this was a case of assessment

as an individual and not an assessment of a Hindu undivided family.

10. In CIT verses. D.R. Naik the assessee was the sole surviving member of a Hindu undivided family.There was a decree of Court by which the assessee was entitled to receive properties as a residuarylegatee, subject, however, to certain payments of maintenance to widows. The widows continued to bemembers of the family. It was held that though Section 9 of the Income Tax Act did not apply, theassessees assessable income wasonly the balance left after payment of the maintenance charges. Itappears from the facts of the case, however, that there was a charge for the maintenance upon theproperties of the assessee. This case also brings out correctly the principles laid down by the Judicial

Committee that if there be an overriding obligation which creates a charge and diverts the income tosome one else, a deduction can be made of the amounts so paid. Mohini Thapar (Dead) by L.RS. Verses.C.I.T. (Central) Calcutta 9

11. The last case may be contrasted with the case reported in P.C. Mullick and D.C. Aich, In re . There,under a will certain payments had to be made to the beneficiaries. These payments were to be madegradually together with certain other annuities. It was held that the payments could only be made out ofthe income received by the executors and trustees from the property, and the sum was assessable toincome tax in the hands of the executors. It was pointed out that under the will it was stated that theamounts were to be paid out of the income of my property, and thus, what had been charged was theincome of the assessees, the executors. The case is in line with the decision of the Privy Council in P.C.Mullick verses. CIT.

12. In Hira Lal, In re there was a joint Hindu family, and under two awards made by arbitrators whichwere made into a rule of the Court, certain maintenance allowances were payable to the widows. Thesepayments were also made a charge upon the property. It was held that inasmuch as the payments wereobligatory and subject to an overriding charge they must be excluded. Here too, the amount payable tothe widows was diverted from the family to them by an overriding obligation in the nature of a charge,and the income could not be said to accrue to the joint Hindu family at all.

13. In Prince Khanderao Gaekwar verses. CIT, there was a family trust out of which two grandsons of thesettler had to be paid a portion of the income. It was provided that if their mother lived separately, thenthe trustees were to pay her Rs 18,000 per year. The mother lived separately, and two deeds wereexecuted by which the two grandsons agreed to pay Rs 15,000 per year to the mother, and created acharge on the property. The sons having paid Rs 6000 in excess of their obligations, sought to deduct theamount from their assessable income, and it was allowed by the Bombay High Court, observing thatthough the payment was a voluntary payment, it was subject to a valid and legal charge which could beenforced in a court of law and the amount was thus deductible under Section 9(1) (4). There is nodistinction between a charge created by a decree of Court and one created by agreement of parties,

provided that by that charge the income from property can be said to be diverted so as to bring thematter within Section 9(1)(4) of the Act. The case was one of application of the particular section of theAct and not one of an obligation created by a money decree, whether income accrued or not. The caseis, therefore, distinguishable from the present, and we need not consider whether in the specialcircumstances of that case it was correctly decided.

14. In V M. Raghavalu Naidu & Sons verses CIT the assessees were the executors and trustees of a will,who were required to pay maintenance allowances to the mother and widow of the testator. The


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amount of these allowances was sought to be deducted, but the claim was disallowed. SatyanarayanaRao and Viswanatha Sastri, JJ. Distinguished the case from that of the Privy Council in Bejoy SinghDudhuria case. Viswanatha Sastri, J. Observed that the testator was under a personal obligation underthe Hindu law to maintain his wife and mother, and if he had spent a portion of his income on suchmaintenance, he could not have deducted the amount from his assessable income, and that the positionof the executor was no better. Satyanarayana Rao, J. Added that the amount was not an allowance

which was charged upon the estate by a decree of Court or otherwise and which the testator himselfhad no right or title to receive. The income which was received by the executors Mohini Thapar (Dead)by L.RS. Verses. C.I.T. 10 (Central) Calcutta included the amount paid as maintenance, and a portion of itwas thus applied in discharging the obligation.

15. The last cited case is again of the Bombay High Court, which seems to have influenced the decisionin the instant case. That is reported in Seth Motilal Manekchand verses CIT. In that case, there was amanaging agency, which belonged to a Hindu joint family consisting of A, his son B and As wife. Apartition took place, and it was agreed that the managing agency should be divided, A and B taking a

moiety each of the managing agency remuneration but each of them paying As wife 2 as. 8 pies out oftheir respective 8 as. Share in the managing agency remuneration. Chagla, C.J. and Tendolkar, J. Heldthat under the deed of partition A and B had really intended that they were to receive only a portion ofthe managing agency commission and that the amount paid to As wife was diverted before it became

the income of A and B and could be deducted. The learned Judge observed at p. 741 as follows:

We are inclined to accept the submission of Mr Kolah that it does constitute a charge, but in ouropinion, it is unnecessary to decide this question because this question can only have relevance andsignificance if we were considering a claim made for deduction under Section 9(1) (4) of the Income TaxAct where a claim is made in respect of immovable property where the immovable property is chargedor mortgaged to pay a certain amount. It is sufficient for the purpose of this reference if we come to theconclusion that Bhagirathibai had a legal enforceable right against the partner in respect of her 2 annasand 8 pies share and that the partner was under a legal obligation to pay that amount.

16. These are the cases which have considered the problem from various angles. Some of them appearto have applied the principle correctly and some, not. But we do not propose to examine thecorrectness of the decisions in the light of the facts in them. In our opinion, the true test is whether theamount sought to be deducted, in truth, never reached the assessee as his income. Obligations, nodoubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is adifference between an amount which a person is obliged to apply out of his income and an amountwhich by the nature of the obligation cannot be said to be a part of the income of the assessee. Whereby the obligation income is diverted before it reaches the assessee, it is deductible; but where theincome is required to be applied to discharge an obligation after such income reaches the assessee, thesame consequence, in law, does not follow. It is the first kind of payment which can truly be excusedand not the second. The second payment is merely an obligation to pay another a portion of ones ownincome, which has been received and is since applied. The first is a case in which the income neverreaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and onbehalf of the person to whom it is payable. In our opinion, the present case is one in which the wife andchildren of the assessee who continued to be members of the family received a portion of the income of

the assessee, after the assessee had received the income as his own. The case is one of application of aportion of the income to discharge an obligation and not a case in which by an overriding charge theassessee became only a collector of anothers income. The matter in the present case would have beendifferent, if such an overriding charge had existed either upon the property or upon its income, which isnot the Mohini Thapar (Dead) by L.RS. Verses C.I.T. (Central) Calcutta 11 case. In our opinion, the casefalls outside the rule in Bejoy Singh Dudhuria case and rather falls within the rule stated by the JudicialCommittee in P.C. Mullick case.


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17. For these reasons, we hold that the question referred to the High Court ought to have beenanswered in the negative. We, accordingly, discharge the answer given by the High Court, and thequestion will be answered in the negative. The appeal is thus allowed with costs here and in the HighCourt.

C.i.t. Verses sunil j. Kinariwala

(whether there is diversion of income or application of income, the determining factor is the nature andeffect of assessee's obligation in regard to the amount in question. Where such obligation entitles a thirdperson to receive the amount before the assessee could lay a claim to receive the same as his income,there is diversion of income by an overriding title. But "where after the receipt of the income by theassessee, the same is passed on to a third person in discharge of an obligation that would be a case ofapplication of income and not diversion of income.)

Facts: the assessee, a partner in the partnership firm, known as "m/s kinariwala r.j.k. Industries",

ahmadabad, (for short, "the firm"). He was having ten per cent share in the firm. On 27-12-1973, he created a trust

named "sunil jivanlal kinariwala trust" by a deed of settlement. He assigned to the trust fifty per cent of his ten

per cent right, title and interest (excluding capital), as a partner in the firm, and a sum of rs. 5,000 out of hiscapital in favour of the said trust. There are three beneflcieries of the trustthe assessee's brother's wife, the

assessee's niece and the assessee's mother. In assessment year 1974-75, the assessee claimed that as fifty percent of the income attributable to his share from the firm, stood transferred to the trust resulting in diversion

of income at source, the same could not be included in his total income for the purposes of his assessment.

The income-tax officer rejected the claim on the plea that it was a case of application of income and not

diversion of income at source. Against the order of assessment, the assessee appealed before the appellate

assistant commissioner of income-tax who allowed the appeal directing that a sum of rs. 20,141 which stood

transferred to the trust under the settlement, be excluded from the total income of the assessee. However, on

appeal by the revenue, the tribunal reversed the order of the appellate assistant commissioner. The high court held,

inter alia, that on assignment of fifty per cent share of the assessee in the firm, it became the income of the

trust by overriding title and it could not be added in the total income of the assessee.

Issues before the supreme court: (1) "whether, on the facts and the circumstances of the case,assignment of 50 per cent out of the assessee's ten per cent share in right, title and interest (excluding capital) in

m/s kinariwala r.j.k. Industries in favour of sunil jivanlal kinariwala trust under a deed of trust dated 27-12-1973

creates an overriding title in favour of the trust and whether the income accruing to the trust can be treated

as the income of the assessee?

(2) whether, on the facts and in the circumstances of the case, the sum of rs. 24,141 being the profits

referable to 50 per cent, out of the assessee's right, title and interest of ten per cent, in the partnership firm of

messrs kinariwala r.j.k. Industries is not the real income of the assessee, but of sunil jivanlal kinariwala trust

and as such assessable only in the hands of the trust?"

Decision of the supreme court: the supreme court answered the above questions in favour of the revenue

and against the assessee. The court was of the view that the share of the income of the assessee assigned in

favour of the trust has to be included in the total income of the assessee.

The supreme court pointed out that under the scheme of the act, "it is the total income of an assessee,

computed under the provisions of the act that is assessable to income-tax. So much of the income which an

assessee is not entitled to receive by virtue of an overriding title created in favour of a third party would get

diverted at source and the same cannot be added in computing the total income of the assessee. The principle is

simple enough but more often than not, as in the instant case, the question arises as to what is the criterion to

determine, when does the income attributable to an assessee get diverted by overriding title? The


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determinative factor, in our view, is the nature and effect of the assessee's obligation in regard to the amount in

question. When a third person becomes entitled, to receive the amount under an obligation of an assessee

even before he could lay a claim to receive it as his income, there would be diversion of income by an

overriding title; but when after receipt of income by the assessee, the same is passed on to a third person in

dischargeof the obligation of the assessee, it will be a case of application of income by the assessee andnot diversion of income by overriding title."

The supreme court after referring bejoy singh dudhuria verses c.i.t.,p.c. Mullick verses c.i.t.) and c.i.t. Verses

sitaldastirathdas gave instances, inter alia, of the following cases:

In k.a. Ramachar verses c.i.t. (1961) , the assessee was a partner in a firm. He executed three deeds of

settlement in favour of his wife, married daughter and a minor daughter, assigning to each of them one-fourth

of his share of the profits in the firm. They were entitled to receive and collect their share from the firm under the

settlement. The assessee contended that the amounts covered by the settlements could not be included in his

total income for the purpose of assessment to income tax. Applying the principle laid down in sitaldas tirathdas it was

held that under the law of partnership, it was the partner and the partner alone who was entitled to profits and

that a stranger, even if he were an assignee, did not have and could not have any direct claim to the profits, the

claim of the assessee was negatived on the ground that what was paid was in law a portion of his income, as such

the amounts have to be included in his total income. The ratio of this case squarely applies to the facts of the case

on hand.

In moll lal chhadami laljain verses c.i.t. (1991), a company took over the business of the hindu undivided family

(referred to as "the landlord"). Under the agreement of lease with the landlord, the company was required to pay

rupees ten thousand to a college, run by a trust out of the annual rent of rupees twenty-one thousand. In a

subsequent agreement entered into between the landlord, the company, the trust and the college, it was

stipulated, inter alia, that in the event of failure to pay the amount to the college, it would have full right to

recover the said amount by recourse to the court and that the college shall have the first charge on the

property. The landlord claimed that the amount paid to the college was the income of the college as it got diverted

by an overriding title and ceased to be the income of the landlord. That contention was rejected by the tribunal as

well as the high court. On appeal to the supreme court, applying the principle in sitaldas tirathdas it was held

by a bench of three learned judges that the stipulation in the agreement to pay rupees ten thousand out of

the annual rent directly to the college was only a mode of application of the income of the landlord, which

made no difference to its liability to pay tax on the entire rent of rupees twenty-one thousand which had accrued tothe landlord. The fact that the college was given the right to sue and recover rupees ten thousand directly from the

company in case of default, it was observed, did not alter the position, nor would creation of charge in favour

of the college make any difference.

In murlidhar himatsingka verses, c.i.t. (1966) , one of the partners of the firm constituted a sub-partnership

firm with his two sons and a grandson. The deed of sub-partnership provided that the profits and losses ofthepartner in the main firm shall belong to the sub-partnership and shall be borne and divided in accordance with

the shares specified therein. It was held that there was an overriding obligation which converted the income of

the partner in the main firm into the income of the sub-partnership and, therefore, the income attributable to

the share of the partner had to be included in the assessment of sub-partnership. That was on the principle

that a partner in the sub-partnership and a definite enforceable right to claim a share in the profits accrued to or

received by the other partners in the main partnership. The court distinguished murlidhar himatsingka from k.a.

Ramachar and observed that there was no sub-partnership in k.a. Ramachar.

The supreme court further observed as follows:

"it is apt to notice that there is a clear distinction between a case where a partner of a firm assigns his share

in favour of a third person and a case where a partner constitutes a sub-partnership with his share in the main

partnership. The case on hand cannot be treated as one of a sub-partnership, though in view of section 29(1) of the

indian partnership act, the trust, as an assignee, becomes entitled to receive the assigned share in the profits from


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the firm not as a sub-partner because no sub-partnership came into existence but as an assignee of the share of the

assigner-partner."

Maharaja Chintamani Saran Nath Sah Deo verses CIT

GROVER, J. - This is an appeal from a judgment of the Patna High Court in a reference made to it

under Section 66(1) of the Income Tax Act, 1922, by the Appellate Tribunal by which the following

question of law was referred for determination by the High Court: Whether on the facts and

circumstances of this case, the Tribunal was right in holding that the sum of Rs 2,20,000 was the

income of the assessee assessable to tax under the provisions of the Income Tax Act?

2. The original assessee was Maharaja Pratap Udainath Sah Deo, the holder of an impartible estate.On January 22, 1944 the assessee granted a lease of certain mining rights to Aluminium Production

Company Ltd. In respect of 171.03 acres of land for a period of 30 years. The main terms were as

follows:

(1) Salami (inclusive of Moharkari and Dewani Negi amounting to Rs. 5000) Rs 2,25,000

(2) Rent 8 per acre

(3) Royalty 6 per ton

(4) Minimum royalty Rs 22 per acre. Previously, the assessee had granted a prospecting lease of

311 acres of land to the same Company on March 20, 1941 for a period of one year. The areacovered by that lease though larger included substantially the area leased out subsequently. The

terms of the 1941 lease were that salami was payable at the rate of Rs 100 per acre and royalty at

the rate of 8 annas per ton.

3. While making the assessment for the year 1944-45 the Income Tax Officer took the view that the

assessee had chosen to take a large sum by way of salami while granting the lease in the year 1944

and had accepted lesser rate of royalty, the salami represented an advance payment of royalty. He

treated Rs. 5000 out of the sum of Rs. 2,25,000 as Dewani Negi and Moharkari and the balance of

Rs. 2,20,000 was treated by him as income of the assessee, and the assessment was madeaccordingly. On appeal the Appellate Assistant Commissioner held that the amount of Rs. 2,20,000

was paid by the Company to the assessee as salami and as such it was a capital receipt and not

taxable. On appeal by the revenue the Appellate Tribunal by an order, dated August 7, 1952,

remanded the case to the Appellate Assistant Commissioner for finding whether there were

circumstances to indicate that the salami was really receipt of income. The Appellate Assistant

Commissioner made a report, dated April 12, 1956. He gave a finding that the assessee hadintentionally accepted lower royalty and taken higher Salami and therefore the major portion of

the sum of Rs. 2,20,000 had been taken in exchange of royalty that would have accrued during theperiod of lease. The Tribunal by an order, dated July 26, 1956 allowed the appeal of the Revenue

and restored the order of the Income Tax Officer. The High Court held that out of the sum of Rs.

2,20,000 the amount which could be regarded to be salami and treated as a capital receipt could

reasonably be estimated at a sum of Rs. 20,000 which was assessable to tax but the remaining

amount of Mohini Thapar (Dead) by L.RS. Verses C.I.T. 18 (Central) Calcutta Rs. 2,00,000 was

revenue receipt and was taxable as such. The question referred was reframed as follows:


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Whether on the facts and the circumstances of this case, the Tribunal was rightin holding that the

sum of Rs. 2,20,000 or any portion thereof was the income of the assessee assessable to tax under

the provisions of the Income Tax Act? It was answered partly in favour of the assessee but

substantially in favour of the Revenue.

4. The principles on which the courts have acted whenever a question has arisen whether a

payment described as a salami is capital or revenue receipt are well settled. Salami is a singlepayment made for the acquisition of the right of the lessor by the lessee to enjoy the benefits

granted to him by the lease. That general right may properly be regarded as a capital asset and the

money paid to purchase it may properly be held to be a payment on capital account. But merely

because a certain amount paid to the lessor is termed as Salami, it does not follow that no inquiry

can be made to determine whether it has or has not an element of revenue receipt in the shape of

advance payment of royalty or rent. The onus, however, is upon the Income Tax authorities to

show that there exist facts and circumstances which would make payment of what has been called

salami income. The position may be summed up in this way. When the interest of the lessor is

parted for a price the price paid is premium or Salami but the periodical payments made for the

continuous enjoyment of the benefits under the lease are in the nature of rent; the former is a

capital receipt and the latter a revenue receipt. Parties may camouflage the real nature of the

transaction by using clever phraseology and, therefore, it is not the form but the circumstances of

the transaction that matter. The nomenclature used may not be decisive or conclusive but it helpsthe courts, having regard to the other circumstances to ascertain the intention of the parties. [See

CIT, Assam, etc. Verses Panbari Tea Co. Ltd.].

5. Now the Appellate Tribunal appears to have based its decision only on the difference between

the amount of salami and the rate of royalty between the prospecting lease which was granted in

1941 and the subsequent lease of 1944. This is what the Tribunal stated in Para 7 of its order:

In 1941, the assessee had granted a prospecting lease in favour of the very lessee taking a much

smaller premium fixing the royalty at 8 per ton. He has not shown any justifiable reason for fixing

up a lower amount of 6 per ton by way of royalty in the later lease. We found that out of the area

of 171 acres that was covered by the later lease a substantial portion of it about 140 acres werecomprised in the area leased out by the earlier deed of 1941. A week argument was attempted by

the assesseesrepresentative the older lease was only for Bauxite whereas the later lease was forLaterite also. In view of the fact that major portion of the area that is covered in the new lease was

in the older lease and as in the course of the producing Bauxite, Laterite also becomes available,

we do not see any justification for the assessee agreeing to take a lesser amount by way of

royalty.Mohini Thapar (Dead) by L.RS. Verses C.I.T. (Central) Calcutta 19 The Tribunal proceededto say: Here in the present case, what we find is that the assessee had chosen to take a large

amount by way of premium but a lesser amount by way of royalty. The patent reason for the

assessee to take a lesser amount by way of royalty was that the amount received by him as Salami

was not taxable. There is, therefore, no doubt in this case that the sum received by the assessee by

way of salami or premium was in substance an advance payment of royalty. We are, therefore, in

entire agreement with the Income Tax Officers Order.

We are unable to appreciate how a comparison of the terms of the lease of 1941 which was only

for one year and which was for a different purpose, namely, prospecting could afford a reasonablebasis for determining whether the terms of the 1944 lease were fixed in such manner that part of

the proceedings of royalty were included in the figure of the salami. The object of a prospecting

lease is entirely different and since the period was only one year it is quite reasonable to assume

that the royalty was fixed at a higher rate because it was not known how much quantity of mineral

would be extracted during that period. The lease of 1944 was for a much longer period i.e. 30

years. When a lessor creates a lease for that period it is legitimate for him to charge more amount

by way of salami or premium as he is transferring possession of the demised land for a


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considerably long period. A lessor may also think that the rate of royalty need not be the same as it

was in the case of the prospecting lease and taking an over all business view royalty at a slightly

less rate may be charged. The Tribunals decision based as it was only on a comparison of the terms

of the leases of 1941 and 1944 does not appear to take into consideration all these relevant

matters. It must not be forgotten that the mere fact that the amount taken on account of salami

was substantial and on the face it looked considerably large would not justify the view that that

amount represented capitalized royalty. In the Panbari Tea case certain tea estates had beenleased out for a period of 10 years. The lease was executed on a consideration of a sum of Rs.

2,25,000 as and by way of premium or salami and an annual rent of Rs. 54,000 to be paid by the

lessee to the lessor. The payments were to be made by instalments. This court declined to assume

that the parties had camouflaged their real intention and fixed a part of the rent in the shape of

premium and it was observed that no material had been placed either direct or circumstantial to

disbelieve the description given in the lease deed to the amount as premium and to hold that it

was not in fact premium but only rent. The position does not seem to be different in the present

case.

6. A good deal of emphasis has been laid on behalf of the Revenue on the statement in the order of

the Tribunal towards the conclusion that it was in entire agreement with the Income Tax Officers

order. It is submitted that the Income Tax Officer had gone into the details of other leases which

had been granted by the assessee of similar nature and after a comparison of the terms of thoseleases the Income Tax Officer had reached the conclusion that the amount of salami represented

the capitalised royalty. We cannot read the order of the Tribunal in that way. The Tribunal agreed

only with the operative part of the order of the Income Tax Officer but not with his reasoning. At

any rate, the Appellate Assistant Commissioner had submitted a remand report pursuant to a

previous order of the Tribunal and it does not appear that the facts given in that report were at allconsidered by the Tribunal although the High Mohini Thapar (Dead) by L.RS. Verses. C.I.T. 20

(Central) Calcutta Court based its decision largely on them. The terms of the leases on which the

High Court relied, related to the years 1933, 1938 and 1945; the rate of royalty varied from 8 Annas

to 12 Annas per ton and that of salami from Rs. 100 to Rs. 130 per acre. No attempt was made to

examine anyone on behalf of the assessee to explain all the circumstances in which these leases

had been granted. The High Court felt that it was for the assessee to furnish an explanation as towhy salami in the case of 1944 lease was raised to Rs. 1284 per acre whereas in the other leases

the figure was much less as stated before. This approach cannot be regarded as correct. The onus

was on the Revenue to show what was stipulated in the indenture of lease as a payment by way of

salami was some other kind of payment, namely, royalty, camouflaged as salami. In this situation it

was open to the Appellate Assistant Commissioner at the stage of submitting the remand report to

have examined the assessee or his representative and discovered all the reasons for the termsbeing different. Another factor that was relied upon was the report of the Mines Superintendent,

dated January 7, 1956 according to whom the area leased out in 1944 contained commercial grade

Bauxite of approximately 13 lakh tons. The Appellate Assistant commissioner at the stage of

remand worked out the amount which would be payable as royalty on this estimated quantity of

the total reserve of Bauxite in the dismissed area. The total amount of royalty was calculated at Rs

6,50,000 according to the rates fixed by the 1941 lease and at Rs 4,87,500 according to the rateagreed upon in the 1944 lease. The High Court was of the view that these figures showed that the

major part of the salami of Rs. 2,25,000 had been taken in exchange of the royalty that would haveaccrued during the period of the lease. We have already pointed out that a comparison of the

terms of the prospecting lease which was only for one year with the subsequent lease of 1944

which was for 30 years could not furnish a proper basis for determining the point in dispute.

Moreover the High Court lost sight of the fact that the report of the Mines Superintendent was

made long after the date of the 1944 lease and it could not be assumed that at the time of the

granting of that lease the assessee knew how much quantity of the mineral could be extracted

from the area which had been leased out. Even the High Court felt, in disagreement with the


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Tribunal, that the entire amount of the Salami could not be regarded as representing the

capitalized value of royalties. The High Court proceeded to assess the salami at Rs. 20,000 on the

basis that for the other leases the rate agreed upon was Rs. 100 per acre. We are unable to concur

in this method of computing the amount of the salami. Much more material was required for

discharging the onus which lay on the Revenue to show that the assesssee was bound to charge

only the same amount of salami which had been taken for the other leases about which the details

of the quantity of minerals which could be extracted from the area covered by them werealtogether lacking.

7. For the reasons given above the appeal is allowed and the order of the High Court is set aside.

The answer to the question referred is returned in favour of the assessee and against the Revenue.

Bacha f. Guzdar verses comm. Of income-tax

(even if the entire profit of a company constitutes agricultural income, the dividends received by a share holderof that company from the company do not constitute agricultural income.)

Facts: the appellant was a shareholder in two companies and received from those companies dividends

aggregating to rs. 27507- in the accounting year 1949-50. The two companies carried on business ofgrowing and manufacturing tea. By rule 24 of the indian income-tax rules 1922, 40% of the income of the teacompanies was taxed as income and 60% was exempt from tax as agriculture income. According to theappellant, the dividend income received was to the extent of 60% agricultural. On the other hand, revenuecontended that dividend income was not agricultural and, therefore, whole of the income was liable to tax. Thei.t.o. A.a.c., a.t. And the high court held that the dividend income was not agricultural.

Decision of the supreme court: the supreme court also decided that the dividend income was not agriculturalbecause the shareholder did not derive his dividends from land, but that his income from dividend arose by virtueof his holding of shares in the company. The principle established was that in order to determine the character ofcertain income what one had to consider was the immediate and effective source and not the remote or ultimatesource. In the course of the judgment, the supreme court said:

"agricultural income as defined in the act is obviously intended to refer to the revenue received by directassociation with the land which is used for agricultural purpose and not by indirectly extending it to case wherethat revenue or part there of changes hands either by way of distribution of dividends or otherwise. In factand truth dividend is derived from the investment made in the shares of the company and the foundation of itrests on the contractual relations between the company and the shareholders.

Dividend is not derived by a shareholder by his direct relationship with the land. There can be no doubt that theinitial source which has produced the revenue is land used for agriculture purpose but to give to the words 'revenuederived from land" the unrestricted meaning, apart from its direct association or relation with the land, would bequite unwarranted...."

"a shareholder has got no interest in the property of the company though he has undoubtedly a right toparticipate in the profits if and when the company decides to divide them. The company is a juristic person and is

distinct from the shareholder. It is the company which owns the property.


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Premier construction co. Ltd. Verses c.i.t., bombay city

(receipt as remuneration a commission under the managing agency agreement at a certain percentage of the net

profit of a company whose income was partially agricultural income was held not to be agricultural income

even proportionately.)

Facts: the assessee (the appellant) was the managing agent of marsland price and company limited(hereinafter called the "principal company"). It was entitled to a commission under the managing agency agreement.The remuneration of the assessee was regulated by clause 2 of the agreement and under sub-clause (b) the assesseewas entitled to:

"a commission at the rate of ten per cent per annum on the annual profits of the principal company aftermaking all proper allowances and deductions from revenue for working expenses chargeable against profits butwithout making any deduction for depreciation or in respect of any amount carried to reserve or sinking fund orany payment on account of super-tax or any deduction for expenditure on capital account provided that suchcommission shall not in any year amount to a less sum than rupees ten thousand."

The year of assessment was the year 1942-43. The assessee received as remunenssion under the managingagency agreement a commission at the rate of ten per cent of the net profits of the principal company, that sumbeing in excess of the minimum salary secured by the agreement. The whole of this remuneration, less certaindeduction which were not in question, was assessed to income-tax by the income-tax officer.

One of the sources of income of the principal company was the manufacture of sugar from sugarcane grown onits own farms and from surgarcane brought from outside, and it was not disputed that in so far as its incomewas derived from sugar manufactured from its own sugarcane such income was agricultural income and as suchwas exempt from income-tax. The assessee claimed that as its remuneration was calculated with reference to theincome of the principal company, part of which was agricultural income, such part of the remuneration as wasproportionate to the agricultural income of the principal company, was itself agricultural income and as suchexempt from income-tax. The claim was rejected by the income-tax officer, and an appeal by the assistantcommissioner of income-tax, the appellate tribunal and the high court.

Issue: whether, in the circumstances of this case, that portion of the income received by the assessee fromthe principal company of marshal price and company limited, which is proportionate to the 'agricultural income'earned by the principal company, is 'agricultural income' within the meaning of section 2(1) of the income-taxact, 1922 (corresponding to section 2 (1-a) of the income-tax act, 1961), and exempt form assessment?

Decision of the privy council: their lordship held that where an assessee receives income not itself of a character

to fall within the definition of agricultural income contained in the act, such income does not assume thecharacter of agricultural income by reason of the source from which it is derived, or the method by which it is

calculated. But if the income received falls within the definition of agricultural income it earns exemption, in


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whatever character the assessee receives it. In the present case the assessee received no agricultural income as

defined by the act, it received remuneration under a contract for personal service calculated on the amount of

profits earned by the employer, payable not in specie out of any item of such profits, but out of any money of

the employer available for the purpose. The remuneration therefore is not agricultural income and is not

exempt from tax.

In the course of the judgement their lordships referred the following cases: in gopal saran narain singh versescommissioner of income-tax, bihar and orissa, 3 itr 237, the assessee was entitled to an annuity under a contract,

the annuity being made a charge upon agricultural land. The board held that the annuity was not rent or revenue

derived from land; it was money payable under a contract imposing personal liability on the covenant or the

discharge of which was secured by a charge on land. In commissioner of income-tax, bihar and orissa verses

maharajadhirajof darbhanga,, the assessee carried on business as a money-lender. As security for a debt due to

him in respect of his business he was put into possession of agricultural land as a mortgage. It was held that the

rents received by the assessee from the agricultural land were agricultural income and exempt from income-

tax, and that the exemption was not affected by the circumstances that the rents were received as part of the

money-lending business of the assessee, the exemption depending on the kind of income received and not on the

character of the recipient. In nawab habibulla verses commissioner of income-tax, bengal, , the assessee as the

mutawalli of a wakf received as remuneration for his sendees a monthly salary. It was build by the board that the

fact that the income of the wakf was derived from agricultural land did not make the remuneration paid to the

mutawalli "agricultural income" since the remuneration did not depend either on the nature of the properties which

constituted the wakf estate, or on the amount of income derived there from by the estate. With this case the case

may be compared is muhammad ha verses commissioner of income-tax, central and united provinces, (1942),

where the high court of allahabad held that the assessee as mutawalli of a wakf was entitled, by way of

remuneration for his services, to retain as a beneficiary,


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C.i.t. Verses raja benoy kumar sahas roy

(the expression "land used for agricultural purposes" in the income-tax act does not extend to forest of

spontaneous growth where nothing w done toprepare the soil for trees to be planted therein and where

growth of the trees is not fostered,)

Facts: the respondent, raja benoy kumar sahas roy owned 600 acres of forest and was assessed to landrevenue. In the forest there were sal and piyasal trees which were of spontaneous growth although the raja hademployed a large number of workers and labour for weeding, felling, clearing, cutting of channels to help the flowof rain water, guarding the trees against pests and other destructive elements, and also for sowing seedsafter digging of the soil in denuded areas.

The raja while submitting his return showed a certain amount as income which he derived from the sale oftrees, but at the same time said that this income from the forest was not assessable under the income tax act.As it was purely agricultural income which was exempt under, section 4 (3) (vii) of the income-tax act, 1922(corresponding to section 10(1) of the income-tax act, 1961). The income tax officer rejected the claim andadded the net income from the sale of forest trees after allowing a deduction of the expenditure incurred

on maintaining of forest. The appellate assistant commissioner confirmed the order of assessment and theincome tax appellate tribunal also held that the said income was not agricultural income within the meaning of theact. At the instance the raja (assessee) a reference was made to the high court of calcutta on the point: "whetheron the facts and in the circumstances of this case, the sum of rs. 51.9777- as agricultural income and as such isexempt frompayment of tax"?

The ground on which the said income was assessed to income tax was that the income derived from the sale ofsal and piyasal trees in the forest which was originally a forest of spontaneous growth and the trees were not grownwith the aid of human skill and labour but on which forestry operations described above had been carried out.

Contentions of the assessee: the assessee contended that no doubt the forest was 150 years old, butthat he was having a large number of workmen and labour whose job was to prune the trees, do theweeding, felling and clearing, cutting of channels for the supply of rain water, guarding the trees againstpests, and also sowing the seeds after digging the soil in the denuded areas. Thus there was human skill andlabour involved, until such operations were performed on the trees he could hardly derive any benefit there from.What he did on the trees with the aid of workmen and labour were indeed 'agricultural operations' if the expressionwas interpreted liberally, statute gives exemption to an assessee, such exemption clause should be liberallyinterpreted.

Decision: it was observed that "a fiscal statute should, no doubt, be construed strictly, and if there be any doubtabout its construction the subject must be given the benefit. But we do not feel any doubt that the expression'land used for agricultural purposes" in the income tax act does not extend to forest ofspontaneous growth


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where nothing is done to prepare the soil for trees to be planted therein and where the growth of the trees is

not fostered ,.......".

According to their lordships the basic agricultural operations include weeding, digging, removal of

undesirable under-growths, and all operations which foster the growth and preserve the same, apart from the

primary operations such as tilling of the land, sowing of the seeds, planting and similar operations. The later

operations must be in conjunction with the earlier operations. Thus mere performance of subsequent operationson the products of the land, where such products have not been raised on the land by the performance of the

basic operations, would not be enough to characterize them as agricultural operations.

It was observed that there is no doubt that the forest in question was of spontaneous growth. If there

were no other facts found that would entail the conclusion that the income is not agricultural income. But the

tribunal has found that the forest is 150 years old though portions of the forest have from time to time been denuded

and fresh trees have been planted in those areas and operations for the purpose of nursing the trees were performed.

It cannot be denied that so far as those trees are concerned, the income derived there from would be

agricultural income.

But the forest is said to be 150 years old and all the trees cannot be said to have been grown in this

manner after employing human skill and labour. Therefore, the entire income from the forest trees cannot be

termed agriculture income.

It was observed that the income tax authorities should have directed an enquiry to ascertain how much

of the income is attributable to forest of spontaneous growth and how much to trees planted by the assessee.

Since a lot of time had elapsed, their lordships did not feel like ordering any such enquiry at this stage. Having regard

to expenditure incurred on maintaining forest relation to the total income, their lordships felt that a "substantial

portion of the income must have been derived from trees planted by the proprietors themselves". As the

department has made no attempt to establish which portion of income is attributable to forest of spontaneous

growth, there are no materials on which we could say that the judgment of the court below is wrong.


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C.l.t. Verses maddi venkatasubbaya

(where the assessee purchases a standing crop and sell it immediately after its harvest or afterperforming subsequent operations, the income derived from such sale cannot be treated as agriculturalincome because the assessee has not derived the income by cultivating the land or performing basicoperations.)

Facts: the assessee, a firm of merchants, purchased a standing crop of tobacco on an area of 93 acres 12cents for rs. 13,833 in january 1943, from the person who had raised the tobacc6 on the land. The tobacco washarvested, cured and sold in the market by the assessee before 21st march, 1943, for rs. 33,498. The plucking ofthe ripe leaves, the pruning and flue-curing of the harvested tobacco were all done by the assessee firm. It isalso stated that there was some sort of ploughing on the land by the assessee. The curing of tobacco is said to be aprocess which is ordinarily employed by a cultivator of tobacco to render it fit for sale in the market. The income-tax officer and the appellate assistant commissioner held that a part of the profits, namely rs. 7500, of theassessee realized by the sale of the tobacco was derived from non-agricultural sources or operations andtherefore liable to income-tax. The appellate tribunals held that the entire profits of the assessee from thetobacco dealer calculated in the sum of rs. 12000 was agricultural income and was exempt from income-tax under section 4(3) of the income-tax act, 1922 (corresponding to section 10(1) of the income-tax act, 1961).The commissioner of income-tax appealed to the high court against the decision of the appellate tribunal

Observation: the assessee was not a landholder or a ryot or a lessee of the land on which the tobacco cropstood. The tobacco plants had been raised on the land by its owner or lessee and they had reached such adegree of maturity as to render them saleable as standing crops to tobacco merchants in the locality. It is notuncommon for merchants and traders in agricultural produce to purchase standing crops of tobacco, sugarcane,groundnut, etc., when the crop is ready or nearly ready for harvest. The purchaser in such a case may have to dosome pruning work with reference to the crops as in this case and then cut the crops and market the produce. The

operations said to have been performed by the purchaser in the present case were evidently performed with theconsent of the person who raised the standing crop. They are incidental to the reaping the fruits of the purchase.

Issue: whether, in the circumstances of the case, the tribunal was right in holding that the sum of rs, 7500 was'agricultural income', within the meaning of section 2(1 )(b) of the income-tax act, 1922 (corresponding to section2(1-a) of the income-tax act, 1961) and exempt from taxation under section 4(3) of the income-tax act, 1922(corresponding to section 10(1) of the income-tax act, 1961)?


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Decision of the high court: the burden is on the assessee who claims exemption to prove that the incomeis 'agricultural income' as defined in the act as held in raja mustafa alt khan verses c.i.t., (1948) .

In c.i.t. Verses sirkameswar singh, (1935) and raja mustafa all khan verses c.i.t., (1948) , agricultural incomehas been held not to be assessable as business profits merely because the recipient of the income is a money-lender who has lent monies on a mortgage with possession and is receiving the rents and profits of agricultural

land in lieu of interest and loan. But this line of argument is not of assistance to the assessee in the present case.

It was agreed that the land on which the tobacco crop was raised was assessed to land revenue and was

used for agricultural purposes. The income of the assessee was obviously not "rent" or "revenue" derived from

such land within the meaning of section 2(1 )(a) of the income-tax act, 1922 (corresponding to section 2(l-a)(a) of the

income-tax act, 1961). The only question was whether it was "income derived form such land by agriculture" within

the meaning of section 2(l)(b)(i) of the income-tax act, 1922 (corresponding to section 2(a)(b)(i) of the income-

tax act, 1961). Rent, revenue or income derived from land by agriculture in section 2 has reference to the

rent, revenue or income derived by a person having some interest in land and by virtue of the fact that he is the

owner of that interest, a profit accruing to a firm of merchants having no interest in land but having a mere

licence to enter upon land and gather the produce as incidental to a transaction of purchase of standing crops,

by a sale of the crops after harvest, differs radically in its character from income derived by way of rent or revenue or

by the performance of agricultural operations by a person having an interest therein as owner, tenant or

mortgagee with possession etc. The profits in the instant case derived by entering into contracts for the purchaseof a commodity and by the resale of that commodity for a higher price.

The fact that the movable property now in question springs from, or is the product of agriculturaloperations carried out by the owner or tenant of agricultural land, does not lead to the conclusion thatthe profit of a trader who has no interest in the land but who buys and sells the movable property in thecourse of his trade is

flagricultural income" defined in the act. A fruit merchant may purchase only the

produce of an orchard belonging to another and a timber merchant may purchase only the trees planted bythe owner of the grove. In these cases he gets the right to gather the fruits or the timber on the land butthe profit realized by the merchant on a sale of the commodity is not agricultural income derived from landbut is business profit.

Thus it was held that the sum of rs. 7500 crores was not exempt from liability to assessment to

income-tax.


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Sakarlal Naranlal verses. C.I.T.

N.H. BHAGWATI, J.Ordinarily we find cases where the assessee relies on section 4(3) (8) and the revenue contests

the claim of the assessee, but here in this reference the position is reversed and we find the revenue relying on

section 4(3)(3) and the assessee disputing that position. The reference relates to assessment year 1954-55, 1955-56

and 1956-57 the corresponding previous years being Samvat Years 2009, 2010 and 2011. The assessee is an

individual and he holds certain agricultural lands. In or about 1952, a friend of the assessee suggested to him the

idea of growing a vegetable product commonly called galka, the botanical name being luffa pentendra and the

assessee accordingly obtained galka seeds from abroad and, after preparing the lands for cultivation, raised galka on

the lands in 1952. Now the kind of galka prown by the assessee was not an indigenous kind but was a kind grown

fairly widely in Formosa, Japan and other places. After the galkas were fully grown, they were removed from the

plants and the assessee then subjected them to a process for preparing what are called loofahs. The process

consisted of various steps taken in the following order:(1) tapping dry galkas for taking out the seeds;

(2) deskinning them;

(3) giving them an acetic acid bath;

(4) holding them in salicylic acid;

(5) drying them in the sun;

(6) putting them in cold water for two days; and

(7) lastly, pressing them for the purpose of packing. The final product which emerges as a result of subjecting galkas

to this process is known as loofah. It is fibrous product in the nature of a pad and we are told that it is commonly

used in the manufacture of shoes.

The foreign loofahs are about 16 in length and 4 in width. The loofahs prepared by theassessee were, however,

only 5 in length and 2-1/2 in width. The assessee tried to marketthese loofahs abroad and sent them to England

on consignment basis for sale, but it was found that it was not possible to sell them. The position was that even ifthey were sold at the lowest possible rate, the assessee would have been liable to pay purchase tax and that would

have caused considerable loss to the assessee. The loofahs were, therefore, reshipped in India. The result was that

loss was suffered by the assessee in this transaction. The assessee claimed a loss of Rs. 1,85,932-8-0 in the

assessment for the assessment year 1954-55 and similar losses were also claimed in the assessment for the

subsequent assessment years 1955- 56 and 1956-57.


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2. We may point out at this stage that the accounts in respect of the activities relating to the cultivation of galkas

were entered by the assessee in the books of account of a business carried on by him in the name of Sakarlal Sons

and Company. After the galkas were raised and removed from the plants, they were transferred by the assessee to

the books of account of another business carried on by the assessee in the name of Minaxi Trading Company at a

particular value determined by the assessee and it was Minaxi Trading Company which processed the galkas and

exported loofahs prepared out of them. The losses set out above were, therefore, suffered by the business of

Minaxi Trading Company and they were obviously arrived at on the basis of the cost of the galkas being taken at thevalue of which they were shown to have been taken over from Sakarlal Sons and Company. These losses were

claimed by the assessee as business arising out of non-agricultural operations but the Mohini Thapar (Dead) by L.RS.

Verses C.I.T. (Central) Calcutta 49 revenue contended that they were agricultural losses and were, therefore, not

liable to be taken into account in computing the income of the assessee from business. That is a question which we

shall presently consider, but it is clear that even if the contention of the assessee is accepted and it is held that the

operation of Minaxi Trading Company were non-agricultural operations, a question might well arise as to the correct

amount of losses suffered by the assessee attributable to these non-agricultural operations. Both the business,

namely, Sakarlal Sons and Company and Minaxi Trading Company being the proprietary business of the assessee,

the revenue may in that event have to apportion the losses suffered by the assessee in the entire transaction

between the agricultural operations carried on in the name of Sakarlal Sons and Company and the non-agricultural

operations carried on in the name of Minaxi Trading Company by resort to rule 7 of the Rules made under section 59

of the Act. We are, however, not concerned with that question and we do not wish to express any opinion upon it.

These facts have been set out by us namely because an argument was founded upon them on behalf of the assessee

for showing the conduct of the assessee as a cultivator.

3. The losses claimed by the assessee were disallowed by the Income-tax Officer on the ground that they were

agricultural losses. The Income-tax Officer took the view that the raising of galkas was ultimately an agricultural

operation and so far as the processing of galkas resulting in the preparation of loofahs was concerned, it was a

process ordinarily employed by a cultivator to render galkas produced by him fit to be taken to market and the

losses resulting from these operations were, therefore, agricultural losses within the meaning of section 2(1) (b) (2).

The assessee carried the matter in appeal, but the Appellate Assistant Commissioner upheld the disallowance of

these losses. The matter was then taken to the Tribunal. The Tribunal also came to the conclusion that the process

employed by the assessee was a process which came within section 2(1) (b) (2) and the losses suffered by the

assessee were therefore, agricultural losses which were not liable to be dedicated in computing the income of the

assessee. Much argument turned upon the question as to what findings of fact were actually reached by the

Tribunal and it would, therefore, be desirable to set out the relevant portion of paragraph 5 and the whole of

paragraph 6 of the order of the Tribunal which were in the following terms:

*I+t was submitted that this was a case where the product galka has a market by itself and that subsequent

operations are in the nature of manufacturing operations which do not come within the scope of the definition of

agricultural income in section 2(1) (b) (2). Reliance for this purpose is placed on evidence in the shape of letters

written by an entity called Messrs. M. Kawanishi of Kobe, Japan. This is a letter, which was written to the assessee

on September 21, 1959, in which it is stated that looking to the quality of the stuff, texture and size, they would have

been in a position to purchase the stuff on assorted basis in the year 1952, round about the 12s per dozen on C.I.F.

Japanese port basis. Another letter written on October 8, 1959, by another party of Japan was also relief upon for

showing that the price in 1952 would have been round about 15-1/2s, a dozen. It is stated that on the basis of these

letters, even dried fruits had a market by themselves and that, therefore, the rest of the activity was not one which

would be an agricultural operations.

Mohini Thapar (Dead) by L.RS. Verses C.I.T. 50 (Central) Calcutta We are unable to agree with this submission. In

order to find out whether there was a market for the produce as such or whether it had to be processed before it

could be sold, what is necessary is to see whether there is a market at which it could be absorbed. The existence of a

theoretical market in a place like Japan is not one that has to be taken into account for this purpose. The section

postulates the performance of any process ordinarily employed by a cultivator so as to render the produce fit to be

taken to market. The expression ordinarily employed would appear to postulate the existence of certain


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conditions at or about the locality in which the produce is grown. The item marketed by the assessee was a stranger

to the Indian market. Therefore, there could have been no ready market in India. Indeed, this position was not

disputed by the assessee. Therefore, merely because there was some possibility of a sale at its original stage, in a

distant country, it does not follow that the fruit by itself had a market, which is relevant for our purpose. If a

produce is grown, say in Kerala, and it does not have a ready market in its original stage there, then merely because

there is some market, say in Punjab, for the produce in its original stage, it does not follow that the process

ordinarily employed by cultivators in Kerala would cease to be agricultural process. In all these matters, what isliable to be looked into is the area in which the produce is grown and the customary process employed to render it

fit for market, if it is not marketable in its original stage. That is why it is a question of fact of each case: see Brihan

Maharashtra Sugar Syndicate Ltd., verses. Commissioner of Income-tax [(1946)]. In our opinion, therefore, in this

case, there was no market it could be sold in its original stage.

The assessee thereupon made an application to the Tribunal for a reference and on the application the Tribunal

made an order referring the following question for the opinion of this court:

Whether on the facts here, where the galka produced does not have a market in India, the process employed on it

for purposes of exporting and selling it abroad satisfies the requirements of section 2(1) (b)(2) of the Act? This was

the form in which the question was framed, but an argument was addressed to us that this question did not bring

out the real controversy between the parties inasmuch as it was based on a very limited postulate, namely, that the

galkas did not have a market in India whereas the actual finding of the Tribunal was that there was no market at all

for the galkas and that the question, should, therefore, be reframed so as to bring out the real controversy between

the parties. We shall consider this argument at the appropriate stage.

4. It is evident that the question depends for its determination on the true construction of section 2(1) (b) (2) of the

Income-tax Act,1922. The question whether the process employed by the assessee for the purpose of preparing

loofahs out of galkas with a view to exporting and selling loofahs abroad satisfies the requirements of section

2(1)(b)(2) becomes material because if the process is covered by section 2(1)(b)(2), the whole of the loss suffered by

the assessee would be agricultural loss and would by reason of section 4(3)(8) be liable to the excluded in computing

the income of the assessee. Section 4(3) (8) provides that agricultural income shall not be included in the total

income of an assessee.

Mohini Thapar (Dead) by L.RS. Verses. C.I.T. (Central) Calcutta 51 Section 2 refers to income derived from land which

means arising from land and denotes income, the immediate and effective cause of which is land. It is divided into

three clauses. Clause (1) in terms takes in income derived from agricultural land by agriculture which would include

agricultural produce as held by the Supreme Court in Dooars Tea Co. Ltd., verses Commissioner of Income-tax .

Clause (2) includes cases of income derived from the performance of any process ordinarily employed by a cultivator

to render the produce fit to be taken to market. The reason behind this provision is not far to seek and it really

provides a clue to its interpretation. A cultivator raises produce from the land with a view to selling it. If there is a

market for the produce as grown, there is no difficulty; the cultivator can in such a case sell the produce without

anything more and he need not perform any process on the produce. But if there is no market for the produce as

grown and it can be sold only by performing some process on it, the cultivator would have to perform such process

in order to be able to sell the produce; otherwise the produce would not be marketable and the raising of it would

be futile. Where such is the case, the legislature says that, though strictly the agricultural operations ceases when

the produce is raised and removed from the soil, the performance of the process should be regarded as a

continuation of the agricultural operations since the process has to be performed by the cultivator for the purpose

of enabling him to sell the produce which the otherwise cannot. It is because the performance of the process is

essential in order to render the produce marketable, which it is otherwise not, that the law regards it as a part of the

agricultural operations carried on by the cultivator. This reason also explains the other requirement of the section,

namely, that the process must be such as is ordinarily employed by cultivators to make the produce saleable. The

performance of the process is assimilated to agricultural operations and must, therefore, like agricultural operations

stricto sensu, be an operation which is ordinarily done by cultivators. If some special or unusual process is employed

by a cultivator, which is not ordinarily employed by cultivators to render the produce marketable, it cannot be

regarded as part of the agricultural operations and the benefit of the income being treated as agricultural income


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would not be available to the cultivator. It will be clear from this discussion that there are two conditions which are

required to be fulfilled before a process performed by the assessee can be said to be a process within the meaning

of section 2(1) (b) (2). The first condition is that the process must be necessary to render the produce fit to be taken

to market and that involves the proposition that there must be no market for the produce in its raw state. If there is

already a market for the produce in its raw state, then the process cannot be said to be a process employed to

render the produce fit to be taken to market or, in other words, to make it marketable. That which is already

marketable does not need any process to render it marketable. The second condition is that the process must beone which is ordinarily employed by a cultivator of the produce to render it marketable. But even if these two

conditions are satisfied, it is not sufficient to attract the applicability of section 2(1) (b) (2). There is an additional

requirement which must be satisfied and that requirement springs directly from the language and the reason of the

enactment. It follows as a necessary corollary from what is stated above that, even where the produce is subjected

to a process ordinarily employed by cultivators to render it fit to be taken to market, the produce must not change

its original character. The cultivator is permitted to subject the produce to a process in order to make it marketable

and what is ultimately marketed must, therefore, be that produce. The character of the produce must not Mohini

Thapar (Dead) by L.RS. Verses. C.I.T. 52 (Central) Calcutta be altered as a result of the process. Of course when we

say this we must make it clear that there may by changes brought about in the produce for the purpose of making

the produce marketable but those changes must not amount to altering the original character of the produce: the

vide Dooars Tea Company case.

5. Turning now to the authorities, the first decision

taxation case law_semester3

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